Theory of the Firm Flashcards
diminishing marginal returns
what happens to the gradient of the total product curve as DMR sets in?
why does DMR occur?
why does the MC curve fall then rise as output increases?
Initially, due to greater specialisation and division of labour, every additional worker contributes more to output than to costs and utilises fixed resources more efficiently, are more productive
When the kitchen is
crowded, producing an additional cookie requires a lot of additional labor and
is thus very costly. Each additional worker contributes more to costs than to output
(When Conrad produces a small quantity of coffee, he has few workers, and much of his equipment is not used. Because he can easily put these idle
resources to use, the marginal product of an extra worker is large, and the marginal cost of an extra cup of coffee is small.
By contrast, when Conrad produces
a large quantity of coffee, his shop is crowded with workers, and most of his
equipment is fully utilized. Conrad can produce more coffee by adding workers,
but these new workers have to work in crowded conditions and may have to wait
to use the equipment.
Therefore, when the quantity of coffee produced is already
high, the marginal product of an extra worker is low, and the marginal cost of an
extra cup of coffee is large
how does the gradient of the TC curve change as output increases?
it rises at a flatter rate then at a steeper rate due to DMR setting in
why does MC equal ATC at the minimum ATC?
why does MP equal AP at the maximum AP?
when MP is greater than AP, AP rises. When MP is less than AP, AP falls.
what causes economies of scale?
? Economies of scale
often arise because higher production levels allow specialization among workers,
which permits each worker to become better at a specific task. For instance, if
Ford hires a large number of workers and produces a large number of cars, it can
reduce costs using modern assembly-line production.
what causes diseconomies of scale?
n. Diseconomies of scale can
arise because of coordination problems that are inherent in any large organization.
The more cars Ford produces, the more stretched the management team becomes,
and the less effective the managers become at keeping costs down
